Transnational litigation regularly produces disputes about producing discovery from affiliated companies in other jurisdictions. In Sicav v. Wang, No. 12-CIV-6682-PAE, 2014 WL 2624753 (S.D.N.Y. June 12, 2014), the Southern District of New York recently clarified the federal view on when parent companies can be required to produce documents from an overseas subsidiary. After first finding that the parent company did not have “legal right, authority, or ability” to obtain documents from its subsidiaries on demand, the Southern District denied Plaintiffs’ motion to compel production of these documents.
On August 31, 2012, Plaintiffs brought a securities class action against SmartHead, Inc., a Nevada holding company with subsidiaries primarily operating in China. During discovery, Plaintiffs moved to compel SmartHeat to produce responsive documents held by its subsidiaries.
In denying Plaintiffs’ motion to compel, the district court first cited general law that a parent “cannot be legally obligated at the threat of sanction to produce [a subsidiary’s documents], unless the intracorporate relationship establishes some legal right, authority or ability [of the parent] to obtain requested documents on demand.” Id. at *4. Courts are to evaluate four factors: “[1] the degree of ownership and control exercised by the parent over the subsidiary, [2] a showing that the two entities operate as one, [3] demonstrated access to documents in the ordinary course of business, and [4] an agency relationship.” Id.
[1] Although SmartHeat acknowledged that it indirectly owned whole or controlling shares in nine subsidiaries, this was not determinative. Instead, SmartHeat exerted little, if any, control over the subsidiaries. SmartHeat did not participate in the subsidiaries’ decision-making processes, did little to monitor the subsidiaries’ activities, and did not independently verify the subsidiaries’ financial information.
[2] SmartHeat did not share employees or an office with its subsidiaries, and all evidence suggested that SmartHeat and its subsidiaries respected the corporate form. In fact, the court noted that SmartHeat appears to be “unusually distinct from its subsidiaries.”
[3] SmartHeat had to go through a cumbersome process to obtain any documents from its subsidiaries, and SmartHeat had “at best very limited and tenuous” access to these documents.
[4] The court dismissed Plaintiffs’ “half-hearted” attempt to argue that there was an agency relationship based on one instance where SmartHeat proposed to sign a joint development agreement even though the work would be conducted by the subsidiaries.
After concluding that each factor weighed against requiring SmartHeat to obtain and produce these documents, the court denied Plaintiffs’ motion. The court’s holding underscores that corporate employees must carefully maintain corporate formalities between the parent and its subsidiaries. Had there been a large overlap of employees, or a sharing of bank accounts, SmartHeat may have been required to expend the time and money to search its subsidiaries’ for responsive documents.